The solvency positions of Canadian defined benefit pension plans declined in the fourth quarter of 2018 after experiencing gains in the first nine months of the year, according to Mercer’s latest pension health index.

The median solvency ratio dropped to 95 per cent at the end of 2018 from 102 per cent at the end of September and 97 per cent at the end of 2017. Less than 30 per cent of plans ended 2018 fully funded compared to 60 per cent at the end of September.

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The setback was primarily due to negative equity returns in the fourth quarter of the year and a drop of 30 basis points in long-term interest rates, according to Mercer.

“Canadian pension plans took a significant hit in the fourth quarter, but thankfully they were starting from a very strong position,” said Manuel Monteiro, leader of the financial strategy group at Mercer Canada.

Unhedged foreign asset exposure relieved pressure for some pensions and those that already had a surplus position were able to absorb the hit. For plan sponsors in Ontario and Quebec, new funding legislation with lower solvency requirements meant much smaller increases to cash funding.

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“The fourth quarter was the most active quarter in Canadian annuity market history, with an estimated $1.5 billion of liabilities being transferred from pension plans to insurance companies,” said Monteiro.

In another new report, Aon noted a decline in the median solvency ratio among its Canadian defined benefit pension plan universe. The median solvency was about 95 per cent as of Jan. 1, 2019, compared to about 103 per cent in the third quarter of 2018. Roughly 38 per cent of plans were fully funded as of Jan. 1, 2019, down 20 per cent since the end of the previous quarter.

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Pension assets experienced negative returns in December 2018, reversing many of the gains they made during the year, according to the report. It cited the depreciating Canadian dollar as an aggravating factor to poor investment outcomes.

“We don’t expect the volatility to end in 2019, but pension plans’ financial positions remain strong after the longest bull run in history,” said Calum Mackenzie, partner and head of investment in Canada at Aon. “There were few places to hide in a brutal end to 2018 but those investors that were well diversified did manage to better protect their portfolios.”